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Sequent Analyst's avatar

I've covered L&G for 10 years, I'm impressed at the coverage of the issues. There are a number of potential tailwinds which don't receive a lot of attention. LGIM's cost income ratio has been rising for some years and I think is close to peaking, this should mean that revenue growth coverts to EBIT growth which has lagged for some time. Longevity reserve releases should also be a natural tailwind in the years ahead as their reserving follows mortality tables which reflect pre-pandemic trends. Over the next 2-3 years this should act as some support to the LGRI earnings. At a more basic level, I think the key to this business is that people value it as a short duration business, yet it is writing policies which will release profits and capital for 15-30 years with zero lapse risk. With no lapse risk, they are uniquely positioned to capture illiquidity premium that banks and asset managers cannot - as they must provide their investors liquidity. Feel free to ask me anything.

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Sequent Analyst's avatar

(1) Aviva, PIC, Rothesay, Phoenix, Scottish Widows all write bulk annuities. PIC I think is the closest competitor and is less than half the size. I think LGEN has two distinct advantages in scale and investment capability (origination and warehousing of assets via LGC). Knowing you’ve an eligible asset with a yield pickup is an advantage in pricing BPA deals. That said, I think it is a very competitive market and my view is the tailwind is so strong it is supply side constrained. (2) Capital position is as strong as it has ever been and in summary I would agree with your take on how IFRS 17 will be viewed over time (the CSM). (3) this was a genuine surprise. I thought Laura Mason or Kerrigan Procter were obvious internal candidates who have been rotating around the main businesses for years. I have met Kerrigan several times and think he was very capable and I confess when I read the announcement I worried LGEN might suffer some senior management churn. I’ve also met the new CEO when he was a lieutenant at HSBC - I was neither impressed/unimpressed so I’m really in wait and see mode… sorry can’t be more helpful on that point. One thing I would say in general is that I’ve always been more impressed with LGEN second tier management than Aviva and it had had experienced much less management churn (Aviva had been a joke) - this in my view is because LGEN is a much more coherent business having disposed of lots of sub scale adjacent businesses. Aviva still has wood to chop.

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